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F E DE RA L RE SERVE B A N K O F R I C H M O N D M A Y 1964 State Government Expenditures, 1950-62 The financial activities of State governments exert a continuing and substantial influence on the economy. States daily perform many governmental functions for individuals and business units and also assist in financing m any of the functions of local gov ernments. Total State expenditures are currently running close to $40 billion, or over three fourths of Federal expenditures exclusive of national defense. F urther, State expenditures have been increasing steadily and somewhat more rapidly than Federal o u tlays; the total increase from 1950 to 1962 was 170% for States and 122% for the Federal Gov ernment. This is a brief look at State expenditures. Con sideration is lim ited to general expenditures, which exclude the spendings of business-type enterprises (such as utilities and liquor stores) and of insurancetrust operations (such as retirem ent system s). The analysis covers the 12-year period 1950-1962, which is perhaps representative of the whole postwar period. A ll data are from the Governments Division of the U. S. Bureau of the Census and are for fiscal years, which usually end on Jun e 30. Special attention is given to the States of the Fifth Federal Reserve Dis trict, om itting the D istrict of Columbia since it is not in any State. Figures for A laska are included beginning in 1959 and for H aw aii beginning in 1960. No adjustm ents were made for the introduction of these two units because their totals were not large enough to affect appreciably the trends or the con clusions given below. Digitized for2 FRASER Total Expenditures S ta rtin g from $11.6 billio n in 1950, general expenditures of all State govern ments by 1962 had reached nearly $31.3 billion. This was an increase of 170% , or an average annual in crement of 8.9% . D uring the same period GNP rose about 95% , or at an annual rate of 5.1% . The in crease in expenditures was fairly evenly spread over the period except that the rise was quite slow during the Korean W ar. In 1950 State expenditures ranged from a low of $21.5 million in N evada to a high of $1,375 million in New York. California was second highest and was the only other State with spendings above $1 billion. At the other extrem e, there were 15 States with totals below $100 million. B y 1962 the range was from a low of $92.8 million to a high of $3,705 million. Nevada was still the low State and only two others were below the $100 million m ark— New H am pshire and Vermont. C ali fornia was top State and w as joined by six others in the billion-dollar class—-Illinois, M ichigan, New York, Ohio, Pennsylvania, and T exas. Total expenditures for the five States of the Fifth District rose from $962 million in 1950 to $2,574 million in 1962. T his was an increase of 168%— almost the same as for all States. The range in the D istrict was much sm aller than in the nation largely because the Fifth D istrict States are more nearly uni form in size, population, and income. The District range in 1950 was from $130.8 million in South Carolina to $303.6 million in North Carolina. From 1950 to 1962 North C arolina had the second lowest rate of increase, 145% , but nevertheless retained top TO TAL STATE G OVERN M EN T EXPENDITURES PER CAPITA STATE GOVERN M EN T EXPENDITURES D ollars position w ith total spendings of $745.2 million in 1962. W est V irgin ia had the lowest rate of increase, 114%, and displaced South Carolina as low State with a total of $320.4 million. M aryland recorded the largest relative growth, 215% , but still finished in third position with $572.1 million, close behind V irg in ia’s $591.3 million. Not all the expenditures were made directly by the S ta te s; a substantial amount was paid out as grants or subsidies to local governments. For the country as a whole, such aid rose from $4.0 billion in 1950 to $10.9 billion in 1962. In each year the amount was slightly more than a third of total expenditures. Expenditures for schools, welfare, and highw ays ac counted for over 80% of all State aid. In the Fifth D istrict States the story was much the same except that State aid payments grew more rapidly than the total, risin g from $331 million in 1950 to $936 million in 1962. A s a result of this 181% gain, aid p ay ments rose from 34.5% of total expenditures in 1950 to 37.4% in 1962. Reflecting larger increases in spending than in revenues, gross debt of all States rose from $5.3 bil lion in 1950 to almost $22 billion in 1962. The 1950 figure was about half of general expenditures for that year, while the corresponding ratio for 1962 was slightly over two thirds. The combined debt for the Fifth D istrict States in this period rose from $512 million to $1,743 million, or somewhat less, pro portionally, than in all States. Per Capita Expenditures S ta te s differ sh arp ly in physical size, terrain, population, income, and in the division of governmental functions between State and local governments. For this reason interstate comparisons of total State expenditures are practi cally meaningless. If, however, expenditures are re duced to a per capita basis some significant com parisons can be made. Nationwide, per capita State expenditures rose from $76.97 in 1950 to $168.96 in 1962, an increase of 119.5%. T hey ranged between $54.48 and $161.98 in 1950, and between $110.47 and $423.99 in 1962. The top States in the earlier year were, in descending order, W ashington, North Dakota, Lou isiana, W yom ing, and Nevada, and their median figure was $140.58. The low States were, in ascend ing order, New Jersey, Kentucky, Georgia, T exas, and Alabama. T heir median figure was $60.73, or considerably less than half that for the high States. B y 1962 the two newest States—A laska and H a w aii—had taken the lead in per capita expenditures. A laska’s high figure is due in part to its low popula tion density, which alw ays makes for high per capita expenses. In both States, the structure of local gov ernment has not been fully developed, with the con sequence that the State governments perform func tions undertaken by localities elsewhere. The per capita figure in 1962 was $423.99 for A laska and $313.55 for H aw aii. The next highest States, in order, were W yom ing, Nevada, and Lou isiana. The median of these high States was $283.69. New Je rsey still occupied the bottom position with $110.47 and other low States were, in ascending order, Ohio, Illinois, Florida, and T exas. The median for these States was $131.55, again less than 3 half the figure for the high States. A notable de velopment here was that two Southern States moved out of the low group and were replaced by two M id western States. In the Fifth D istrict States, average per capita expenditures rose from $69.29, or 90% of the U. S. average, in 1950 to $157.87, or over 93% of the U . S. average in 1962. The absolute difference between the D istrict and the national averages, however, in creased from $8 to $11 over the period. The chart at the right on page 3 show’s the behavior of these two averages. The spread within the D istrict was fairly narrow —from $59.15 to $77.21 in 1950 and from $141.56 to $180.73 in 1962. M aryland led the Dis trict in 1950 but by 1962 W est V irgin ia had gone ahead, due in large part to a decline in population. The other States retained their same order, with North C arolina third, South Carolina fourth, and V irgin ia fifth. A brief exam ination of the structure of per capita expenditures in the different groups of States affords some understanding of w hy their totals differ. The following table shows average per capita expenditures for certain m ajor functions in different State group ings for 1962. The figures are unweighted averages Digitized for 4 FRASER of per capita exp enditures; the high and low States are those identified above. Function Education H ighw ays Public W elfare Hospitals N atural Resources High States $99.17 82.92 24.24 14.60 16.67 A verage Fifth District States Low States $57.99 43.02 23.16 10.66 5.36 $57.65 42.66 16.63 10.53 4.38 $43.59 36.50 19.06 7.92 3.94 u. s. Two patterns in the figures are noteworthy. F irst, except for public w elfare, the figures for the high States approxim ate or exceed twice the corresponding figures for the low States. Second, again ex cepting public w elfare, the figures for the Fifth Dis trict States are close to, and only slightly below, the U. S. average. Ratio of Expenditures to Personal Income D ata on personal income perm it further significant inter state comparisons. The ratio of expenditures to the personal income received in a State is a useful m eas ure of the burden of those expenditures to the people of that State. For the nation, the ratio of State government ex penditures to personal income in the early years of the period fluctuated between 5.5% and 6.0% . The figure w as relatively low in 1952 and 1953, perhaps because of curtailm ent of State activities during the Korean W ar. A fter 1954 the ratio rose steadily, reaching 7.6% in 1962. The chart on this page shows the averages for both the U. S. and the Fifth District States. In 1950 the ratio ranged from 2.3% in New Jersey to 11.4% in Louisiana. The States w ith the highest ratios were Louisiana, Oklahoma, North Dakota, New M exico, and W ashington, with a median figure of 9.7% . The low States w7 ere New Jersey, Illinois, New Y ork, Connecticut, N ebraska, and Ohio, and their median was 3.9% . B y 1962 the range was higher and w ider, from 3.8% in New Je rsey to 15.9% in A laska. In the high group wrere the two newest States plus Louisiana, M ississippi, New M exico, and W yom ing. T heir median w as 13.6% . The low group, w ith a median of 5.4% , w as composed of New Jersey, Illinois, Ohio, N ebraska, and M assachusetts. The average ratio for the Fifth D istrict States w as consistently above the U . S. average. The difference fluctuated from as little as one-half point to as much as a point and a half. Thus, in the D istrict the burden of State expenditures was somewhat heavier than in the country as a whole. W ith in the District, M aryland consistently had the lowest ratio of ex penditures to personal income, while V irgin ia had the second lowest. M arylan d’s ratio did not exceed 6% until 1956 and did not pass 7% until 1962. For the period as a whole, South Carolina had the highest ratio. Its ratio was 10% or higher in five of the years and reached a peak of 10.6% in 1959. North Caro lin a’s ratio was second h ig h e st; in no year did it touch 10%, but in several years it was barely below this figure. W est V irg in ia was in the middle position most of the time but in the final three years its ratio rose sharply from 8.8% to 10.3% to take the lead in the District. Expenditures by M ajor Functions E xp en d itu res for all functions have increased, but much more for some functions than for others. A functional analysis of the data shows the changing importance of dif ferent activities. The percentage distribution of gen eral expenditures by m ajor functions in 1950 and 1962 is given in the chart on this page. F or all States, education rose steadily and sub stantially in importance, moving from 26.6% to 34.3% of the total. H ighw ay expenditures increased only moderately, from 22.3% to 25.5% . Su rp ris ingly, the relative importance of public welfare fell significantly, from 20.4% to 13.7%. Expenditures for health and hospitals showed a somewhat sm aller relative decline. Interest on debt, while not a m ajor expenditure, increased two and a half times in rela tive importance, risin g from 0.8% to 2.0% . Educa tion, highw ays, and public welfare account for nearly three fourths of all general expenditures. Trends in spending patterns in D istrict States were somewhat different. In 1950 expenditures for edu cation were relatively much more important in the District than in all States—34.6% compared with 26.6% . These rose only moderately but were still above the U. S. average in 1962. H ighw ay expendi tures in the D istrict declined in relative importance, from 30.6% to 26.4% , while in the nation they in creased moderately. This m ay have been because Dis trict States took an early lead in highw ay program s and also in recent years have placed less emphasis on expensive constructions necessary to relieve traffic congestion around large metropolitan areas. The relative importance of public welfare expenditures in the D istrict was about the same at the end as at the beginning of the period. A few differences in trends in individual Fifth D istrict States m ay be significant. In M aryland, interest rose eightfold, from 0.4% to 3.2% , and in V irgin ia more than tenfold, from 0.1% to 1.1%. In North Carolina, by contrast, it declined from 1.3% to 0.9% as that State reduced its debt. The share going to education was unusually high in North Caro lina, where the State government carries the basic re sponsibility for public schools; the figure rose from STATE GOVERN M EN T EXPENDITURES BY M A JO R FUNCTIONS Education H ighw ays Public W elfare 1950 1962 All O ther Fifth District States Education H igh w ays All O ther 20 30 40 50 Per Cent of Total 40.8% in 1950 to 45.2% in 1962. Because of w ide spread unemployment, W est V irgin ia devoted a large and rising proportion of its expenditures to public w elfare— 14.8% in 1950 and 19.0% in 1962. Conclusion G eneral ex p en d itu res of the S ta te s have in recent years risen steadily and more rapidly than GNP, personal income, or expenditures of the Federal Government. On any basis of m easure ment, amounts of and changes in expenditures have varied w idely between States. Both on a per capita basis and in relation to personal income the higher figures are often found in the relatively sparsely settled States. On a per capita basis, expenditures of Fifth District States are close to the national averages, but in relation to personal income they have consistently been above those averages. In almost all States education, highw ays, and public welfare account for a very large m ajo rity of State expendi tures. Fifth D istrict States consistently spend a larger part of their funds for education than do the other States as a group. 5 DGE-TUNN L C R O S SES CHESAPEAKE The C h esap eak e Bay bridge-tunnel system, long a dream of m any Tide w ate r V irg in ian s, becam e a reality last month. This engineering m arvel connects V irgin ia's Tidew ater are a with the D elm arva peninsula and provides continuous ro a d w ay along U. S. Route 13. The direct cost of the bridge-tunnel w a s ap p ro xim ately $14 0,0 0 0 ,0 0 0 . C apitalizatio n of interest and other related costs added substantial am ounts, so that the total cost approxim ated $ 2 1 0,0 00,000. It w as financed through revenue bonds w hich are expected to be serviced and retired from toll receipts. Business observers in Eastern V irg in ia expect the new facility to prove a boon to the economic prospects of the D elm arva peninsula. The economy of this a re a , hitherto linked with the V irg in ia Tidew ater section only by ferry, has long been p rim arily agricultural. The project has a lre ad y led to the estab lishment of one industrial firm —a com pany set up to precast concrete products for the bridge-tunnel. This firm w ill continue in operation and w ill em ploy up to 200 persons in peak seasons. Increasing motor traffic through the peninsula is expected to stim ulate developm ent of the area's substantial tourist potential. One of the nel sections prefabricated in Texas is towed i >rfolk to be prepared for sinking at the tunr • The completed tw o-lane bridge-tunnel, called one of the engineering w onders of the modern w orld, requires 20 to 30 minutes traveling time. Tolls are $4 for a car and driver and range from $7 to $16 for trucks. Fishing facilities w ill open on one island in June. BANKERS' ACCEPTANCES In recent years, most notably since 1955, there has been an im pressive revival in the use of bankers’ ac ceptances in financing foreign trade. T his recent growth ends a long period, running from the early 1930’s through W orld W ar II, during which the outstanding volume of acceptances denominated in dollars fell from $1.7 billion in 1929 to $110 million in 1944. In spite of their recent growth in this coun try, bankers’ acceptances are still probably the least fam iliar of all money m arket instruments. W h at is a Bankers’ Acceptance? B a n k e rs’ a c ceptances represent one type of a broad class of credit instruments known as bills of exchange. B ills of exchange, in turn, are drafts, or orders to pay spe cified amounts at a specified time, drawn on indi viduals, business firms, or financial institutions. W hen the drawee form ally acknowledges his obliga tion to honor such a draft—usually by w ritin g “A c cepted” or “ I Accept” w ith the appropriate signature across the face of the draft—it becomes an “ac ceptance.” An acceptance which represents the lia bility of a well-known bank is, for obvious reasons, a more reliable credit instrum ent than one drawn on a little-known firm or individual. Acceptances have legal status as negotiable instru ments which the payee or holder in due course m ay discount in the money m arket. O rdinarily banks “open acceptance credits,” or accept drafts, on behalf of their customers, usually under letters of credit. A customer on whose behalf a draft is accepted is obli gated to provide the bank with funds for payment on or before the m aturity date. L egally, both the draw er, who endorses the acceptance when he sells it, and the accepting bank are obligors of the draft and this makes acceptances an example of what is known in money m arket parlance as “two-name paper.” The resulting high degree of safety renders the acceptance an attractive short-term investment. Acceptance Financing B a n k e r s ’ accep tan ces typically arise from letters of credit in foreign trade transactions. For exam ple, a domestic concern w ish ing to import goods from abroad m ay request its bank to issue a letter of credit on its behalf in favor of the foreign seller. If the bank finds the custom er’s credit standing satisfactory, it w ill issue such a letter, authorizing the foreign seller to draw a draft upon it in payment for the goods. Equipped with this authorization, the exporter, on shipping the goods, 8 can discount the draft with his bank, thereby re ceiving payment immediately. The foreign bank, in turn, forwards the draft, with appropriate shipping documents, to its correspondent bank in this country with instructions respecting its disposition. Gen erally the U . S. correspondent bank w ill present the draft for acceptance at the drawee bank, which for wards the shipping documents to the importer, who now m ay claim the shipment. The correspondent bank m ay be instructed to hold the acceptance until m aturity as an investment for the foreign bank. Or it may be instructed to offer the acceptance for sale in the m arket and credit the deposit account of the foreign bank. In any event, the ultim ate holder of the acceptance is the party actually financing the transaction. The accepting bank m ay, of course, buy the ac ceptance which it originated. In such a case, it earns the difference between the purchase price and the face amount which must be reim bursed by the cus tomer in whose behalf the acceptance credit was opened. It also earns the commission charged for the letter of credit. W hen the bank follows such a course it is actually financing the transaction and its position is much the same as when it extends a loan directly to the customer. On the other hand, if some other party buys and holds the acceptance, the o rigi nating bank has tied up no funds. It has m erely lent the prestige of its name, assum ing a contingent liability, for which it collects a small fee. W hile individual banks often acquire acceptances drawn on themselves, m any prefer to hold instru ments drawn on other banks. The latter instru ments offer some advantages, especially with respect to m arketability. W hen sold, under endorsement, they become three-name p ap e r; that is, they carry the name of three obligors—the draw er and two banks. Three-nam e paper is especially attractive to foreign investors, some of whom purchase only this type. It is not uncommon for accepting banks to sell to dealers their acquisitions of acceptances drawn on themselves and to replace these in their portfolios with instru ments drawn on other banks. Such a practice is known in m arket term inology as “sw aps.” Acceptance Terms M a tu ritie s on b a n k e rs’ ac ceptances range from 30 to 180 days, but 90 days is most common. M aturities can often be tailored to cover the entire period needed to ship and dispose of the goods financed. A s regards both liquidity and safety, bankers’ acceptances are almost as attractive as T reasury bills. T his is reflected in the relatively low m arket yields on acceptances, which generally run only fractionally higher than T reasury bill yields. M arket yields, however, do not present a true picture of the costs of acceptance financing to the borrower, since the accepting bank levies fees for this service. Banks custom arily charge a minimum of \l 2°/ per annum, or / o of 1% per month, for ac cepting a draft on behalf of nonbank customers of the highest credit rating. Less creditworthy cus tomers pay higher fees, w hile charges are somewhat lower wT hen the acceptance is in behalf of a foreign bank. The cost to the borrower, therefore, is equal to the fee plus the discount on the acceptance. In some cases the discount is absorbed directly, as in the case of the foreign bank which draws a draft on a U nited States bank in order to create dollar ex change. In others, the discount is absorbed indi rectly. For exam ple, in a trade transaction the e x porter ostensibly pays the discount, but this is gen erally passed on to the importer (borrow er) in the form of a higher cost for the goods. H istory T h e h isto ry of accep tan ces in E urope dates back to the pre-modern period. Europeans have confidently used these instruments for years and in many instances prefer them to other liquid investments. In this country, however, they have not been so popular, although they wT w idely used ere in the period before the Civil W ar. W hen the F ed eral Reserve System was established in 1914, only a few private banks and other nonbank institutions engaged in acceptance financing. In its early years, the Federal R eserve undertook to promote the development of an acceptance m arket and to this end stood ready to buy bankers’ accept ances at quoted prices. From 1915 through 1934 the Federal Reserve Banks were fairly active buyers, but from 1934 to 1955, purchases were made only oc casionally. D uring the latter period their buying rates were set so high relative to m arket rates that they w ere offered few acceptances. Prior to 1955, the Federal Reserve Banks did not sell acceptances from their own account but held all they purchased to m aturity. In their role as agents for foreign central banks, however, they operated on both sides of the m arket. P artly in response to Federal Reserve efforts, the acceptance m arket grew steadily until 1929. M em ber banks and private concerns created an increasing number of acceptances, and except for a slight setbank in the 1920-21 recession, the volume soared to a peak of $1.7 billion in 1929. T his auspicious be ginning was swamped, however, in the depression of the 1930’s and the 1929 figure was not equaled again until late 1960. In 1955 the F ederal Reserve Banks were au thorized to buy and sell acceptances for their own ac count in the hope that Reserve B anks’ participation would strengthen and broaden the m arket. A t the end of that year, the volume of acceptances outstand ing was approxim ately $642 million. It has moved up rapidly since that time and in December 1963 stood at around $2.9 billion. Recent Uses In th is co u n try, m ost accep tan ces have arisen in the import and export business. In recent years acceptances have found grow ing use in the financing of goods stored in or shipped between foreign countries. Between 1955 and the end of 1963, for exam ple, acceptances arisin g from this source increased more than tenfold, and the total of these now outstanding almost equals the amount based on imports and exports. Acceptances arising from the extension of dollar credits to foreign banks account for only a sm all percentage of the total volume outstanding currently but, as the accompany ing chart shows, the demand for such acceptance credit grew very substantially from 1955 through 1962. T his type of financing is especially attractive to foreign central banks in countries whose exports to the U .S . are highly seasonal. Through the dollar exchange acceptance, those banks seek to provide themselves with dollars to finance their custom ers’ imports during seasons when export earnings are low and dollars are in short supply. In later months, when exports expand, the acceptances are paid off. The Acceptance M arket D espite its recent growth, the m arket for bankers’ acceptances remains far less extensive than that for T reasury bills or com m ercial paper. The most active institutions in the m arket are foreign banks and financial institutions, the Federal Reserve Banks (especially the New York B an k ), a relatively sm all group of large city banks, and a sm all group of nonbank dealers. Recently, however, private domestic investors have become in creasingly interested in acceptances. There are only about five dealers in the bankers’ acceptance m arket, and the m ajority of these deal p rim arily in U nited States Government securities and only incidentally in acceptances. Dealers make a m arket for acceptances by their w illingness to buy and sell on a continuous basis at preannounced rates, which are adjusted frequently in response to money m arket forces. They earn their profits through the Digitized for10 FRASER spread between buying and selling rates, currently of 1% per year, and are consequently most in terested in m axim izing the volume handled. “ Sw aps” by accepting banks account for a large part of dealers’ volume. Dealers inventories are usually held at low levels and in times of brisk demand only a small volume of acceptances is available to nonbank in vestors. Acceptance Investors F o reign b a n k in g and non bank institutions are the most important investor group in the m arket. These have traditionally re garded bankers’ acceptances as highly safe and liquid short-term investments. Foreign holders’ income from acceptances is not subject to the Federal income tax and because of this, foreign holders realize a higher net yield from acceptances than from T reasury bills, although in some countries this advantage is elim inated through reciprocal tax treaties with the U nited States. The next most important investor group is the accepting banks themselves. In December 1963 these banks held 45% of the total outstanding, and about 80% of their holdings consisted of acceptances drawn on themselves. From the standpoint of banks, acceptances have an important advantage over direct loans. A c ceptance financing of custom ers’ credit demands need not involve a charge on the bank’s cash reserves, since the bank, as noted earlier, m ay only be lending its own credit. M oreover, bankers’ acceptances are a better “secondary reserve” than customer loans. Bankers experiencing reserve losses can readily cover these through the sale of acceptances to dealers w hereas liquidation or rediscounting of customer loans would probably involve greater inconvenience, higher costs, and poor customer relations. On the other hand, bankers’ acceptances are complex, require more paper work, and only the larger banks have the name and foreign connections required for success in acceptance financing. Other investors include nonbank corporations as well as commercial banks which are not engaged in acceptance financing as such. A ctivity by this group depends in large part upon the relationship of ac ceptance yields to those of other short-term invest ments. L ack of complete understanding of the m arket and the odd-lot denominations of acceptances, how ever, deter m any nonbank investors. Moreover, this group frequently experiences difficulty in finding ac ceptances to purchase. THE FIFTH DISTRICT B AN KIN G DEVELOPMENTS O perating statements of Fifth D istrict member banks for calendar year 1963 indicate a continuation of the trend toward higher costs and reflect efforts on the part of bankers to offset rising costs by shifting into higher-yield assets. These developments are re flected in significant shifts in the relative importance of various expense items as well as in sources of earnings. R atios employed to detail these results in the paragraphs that follow are simple averages of individual bank ratios. Total operating income of Fifth D istrict member banks moved up in 1963, but total operating expenses increased at an even faster rate. A s a result, net operating earnings before taxes declined from 28.1% of total operating income in 1962 to 27.6% in 1963. This ratio stood at 37.5% as recently as 1952 and has moved downward with few interruptions since that date. Sources of Earnings In te re st on loans accounted for 65.5% of total operating income in 1963, a new high for the postwar period. The increased importance of loans as a source of income was partly the result of continued growth in loans relative to total assets. In addition, however, the average rate of return on loans was higher, as real estate and con sumer loans gained in relative importance. The proportion of total assets held in the form of municipal and corporate securities rose again last year, and the average yield on these assets w as also somewhat higher. Although income from m unici pals and corporates accounted for only 5.8% of total current operating income, its importance in terms of net income after taxes w as much greater than this ratio would indicate. Income sources which declined in relative impor tance in 1963 included interest on U . S. Govern ment securities and service charges on deposit ac counts. Although the average yield on Government securities portfolios last year was 3.48% , compared with 3.33% in 1962, income from Governments com prised a sm aller portion of total operating income as the ratio of Governments to total assets continued the decline that has been evident for some years. The ratio of service charges to total operating income has drifted slowly downward since 1958, and service charges contributed but 4.6% of current operating income last year. Operating Expenses In te re st on tim e and s a v ings deposits has been the fastest grow ing category of operating expense in recent years. These p ay ments, which increased 20.2% in dollar volume in 1963, absorbed 26.7% of current operating income in that year, compared with 25.8% in 1962. The in crease resulted from a substantial growth in time and savings deposits and from a rise in average interest rates from 2.96% to 3.10% . The share of current operating income needed to meet w age and salary payments was sm aller than in 1962. V arious officer and employee benefits, how ever, absorbed a slightly larger percentage of current income than in the preceding year. 11 CHANGES IN SELECTED ASSETS AND LIABILITIES FIFTH D IS TR IC T M E M B ER B A N K S Per Cent + 6.0 - 1st. Qtr. 1962 + 4.0 1st. Qtr. 1963 1st. Qtr. 1964 + 2.0 cQ - 2.0 - 4 .0 - 6.0 - 8.0 Loans and Discounts Total Investments Demand Deposits Time and Savings Deposits Return to Owners T he u ltim ate m easu re of op erating performance is, of course, the return on owners’ equity. In 1963, D istrict member banks’ net current operating earnings before income taxes amounted to 14.4% of total capital accounts, a modest improvement over the preceding year. After adjustm ents for profits on sales of securities, losses on loans, and increases in valuation reserves, net in come before taxes was down fractionally from the 1962 level. T axes on income were also somewhat lower, however, and net income after taxes w as un changed from the preceding year at 8.4% of total capital accounts. Although this return did not rep resent an improvement over the 1962 figure, it was exceeded in only two of the last ten years. The average D istrict member bank declared cash dividends equal to 41.2% of realized net income, down from 43.0% the year before. T his ratio has dis played a considerable degree of instability in recent years, ranging, for exam ple, from 48.3% in 1959 to 37.5% in 1960. In contrast, the ratio of cash divi dends to total net wT orth has fluctuated between 2.9% and 3.2% over the last decade. The figure was 3.1% in 1963. Banking in the F irst Q uarter T o tal cred it at D istrict member banks registered a sm all increase in the first quarter of 1964 as compared with substantial seasonal reductions in comparable periods of the last Digitized for 12 FRASER two years. The 1.3% grow th in loans w as the largest first quarter expansion since 1959, and wrhile the decline in total investments w as greater than in 1961 and 1962, it w as less than in sim ilar periods of other years in the last decade. Information is not yet available as to changes in individual loan categories for all D istrict member banks, but data for those large banks which report such information w eekly m ay indicate the general nature of the changes. For these banks, business loans and all other (p rim arily consum er) loans e x panded at a faster rate than in any first quarter since 1961. R eal estate loans grew at a record pace through the week ending M arch 11, but since that date have shown little increase. N evertheless, their growth rate for the entire first quarter was greater than in the sim ilar period of any recent year. Total investments declined less than in the first quarter of 1963, m ainly because of an unusually large expansion in holdings of securities other than U. S. Governments. H oldings of such securities, m ainly obligations of states and political subdivisions, have grown steadily in recent years. A s of A pril 1, 1964, they accounted for 32.5% of total investments of the w eekly reporting member banks as compared with 22.5% twT years earlier. o Holdings of U. S. Government securities by D is trict w eekly reporting banks dropped substantially in 1963 and declined further in the first quarter of 1964. The lengthening of the average m aturity of Government portfolios, which has been evident for several years, appears to have slowed in the most recent quarter. Governments with less than one year to m aturity accounted for a slightly larger per centage of total investments in the first quarter of 1964 than they did in the final quarter of 1963, while those with more than five years to m aturity rep resented a sm aller fraction of the investment portfolio. Demand deposits, after falling sharply in Jan u ary, recovered somewhat thereafter and the decline for the first quarter w as about seasonal. In contrast, total time deposits grew at a record rate in Jan u ary but increased at a slower pace in F ebruary and M arch. Consequently, growth in tim e and savings deposits for the first quarter was somewhat below that in sim ilar periods of the last two years. PH O TO C o ver—University Departm ent of Public Center District. 6. of North of H igh w ays; W e lfare ; CREDITS W est C aro lin a ; South V irg in ia & 7. C hesap e ake Bay North C aro lina University Bridge C aro lina Departm ent and M edical Tunnel